New York Advisory Opinion TSB-A-96(43)S: Are a manufacturer's sales of corrugated cardboard and box-forming machinery to companies that turn the material into shipping boxes for their own products exempt from New York sales and use tax?

Plain-English summary

Anthony J. Dapolito, CPA, asked on behalf of his client -- a seller of corrugated cardboard and boxes -- about the tax treatment of sales to customers who aren't in the box business themselves but form the corrugated material into boxes at their own facilities to ship their own products to retailers. Some customers also buy box-forming machinery from Petitioner's client, either alone or together with the material, under three different pricing arrangements: (1) the machine's price is folded into the unit price of the corrugated material with no separate bill, and title to the machine transfers once the customer buys enough material; (2) the machine is separately billed, but a percentage of each material purchase is credited against the machine's price, with title passing the same way; or (3) the machine is billed on a straight installment plan with title passing once fully paid.

The Department ruled both the corrugated material and the box-forming machinery can qualify for exemption. The material qualifies under the packaging-materials exemption (Tax Law § 1115(a)(19)) because -- citing the Court of Appeals' Colgate-Palmolive-Peet decision that selling a product in a corrugated carton is legally a sale of both the contents and the carton -- the finished, non-returnable boxes are "actually transferred" to the ultimate purchasers of the customers' products. The machinery qualifies under the production-machinery exemption (§ 1115(a)(12)) because it's used directly and predominantly (over 50% of the time) to make those same boxes for sale. But either exemption only applies in practice if Petitioner's client receives a properly completed Form ST-121 exempt use certificate within 90 days of delivery. The details matter by pricing structure: under arrangement 1 (bundled single price), the whole charge is taxable unless BOTH the material and the machine are certified exempt, since a combined price covering a taxable and an exempt item makes the whole thing taxable per 20 NYCRR 527.1(b); under arrangement 2 (separately billed, if genuinely priced independently), each item's tax treatment depends on its own certificate, so the machine could be exempt while the material is taxed, or vice versa; under arrangement 3 (a pure installment sale of the machine alone), the machine is exempt on its own if a timely certificate is received.

What this means for you

Sellers of packaging material and production machinery to non-packaging manufacturers

Both packaging materials that end up "sold" with the product (because the container is non-returnable and passes to the ultimate customer) and machinery used directly/predominantly to make that packaging can be tax-exempt -- but only with a timely Form ST-121 from your customer. If you bundle a machine's cost into a material's unit price with one combined charge, get certificates for BOTH items, since one missing certificate taxes the whole bundle; billing separately gives you more flexibility if only one item ends up certified.

Manufacturers buying packaging material or box-forming machinery for their own shipping needs

Get your Form ST-121 exempt use certificate to your supplier within 90 days of delivery, and confirm whether your purchase is being billed as one bundled charge or as separate line items -- that distinction determines whether a missing certificate on one item taints the whole purchase.

Common questions

Q: Why is selling a box to a customer treated as "selling the box itself," not just its contents?
A: The New York Court of Appeals held in Colgate-Palmolive-Peet Company v. Joseph that packaging a product in a corrugated carton is legally a sale of both the product AND the carton -- so as long as the box is non-returnable and actually passes to the ultimate purchaser, the packaging-materials exemption under § 1115(a)(19) can apply to the box material itself.

Q: What happens if my customer never sends back an exempt use certificate?
A: The seller must collect sales or compensating use tax on that item. Under a bundled single-price arrangement, a missing certificate on either the material or the machine means tax must be collected on the ENTIRE combined price, not just the uncertified portion.

Q: Does it matter whether the material and machine are priced together or separately?
A: Yes, significantly. A single bundled price is treated as one taxable-or-exempt unit (20 NYCRR 527.1(b)) -- both pieces must be exempt or the whole thing is taxed. Genuinely separate, independently-priced billing lets each item stand or fall on its own certificate, so long as the separately stated prices reasonably reflect the items' true values.

Q: Does the box-forming machine need to be used exclusively to make boxes that get shipped out?
A: No -- the production-machinery exemption only requires the machinery be used "directly and predominantly" (more than 50% of its use) in producing the boxes for sale, not exclusively.

Citations and references

Statutes and regulations:

• Tax Law § 1115(a)(12) (production machinery/equipment exemption)
• Tax Law § 1115(a)(19) (packaging materials exemption)
• Tax Law § 1132(c) (exemption certificate requirements)
• 20 NYCRR 527.1(b) (combined taxable/exempt sale treatment)
• 20 NYCRR 528.13 (production machinery/equipment exemption; directly and predominantly)
• 20 NYCRR 528.20 (cartons, containers, and packaging materials exemption)
• 20 NYCRR 532.4 (exempt use certificates)

Prior rulings and cases referenced:

• Matter of Colgate-Palmolive-Peet Company v. Joseph, 308 N.Y. 333

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a96_43s.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (43)S
Sales Tax
July 11, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO.S950724B

On July 24, 1995, the Department of Taxation and Finance received a Petition for Advisory
Opinion from Anthony J. Dapolito, CPA, Dapolito & Company, 2234 Jackson Avenue, Seaford,
New York 11783.
The issue raised by Petitioner, Anthony J. Dapolito, CPA, is whether the sale by Petitioner's
client of corrugated material and a machine used to form the corrugated material into boxes is subject
to State and local sales and use taxes.
Petitioner submits the following facts as the basis for this Advisory Opinion. Petitioner's
client sells corrugated boxes and cardboard to be formed into boxes at the customer's facility. The
customers purchasing corrugated material are not in the box business, but manufacture the boxes to
be used in the shipment of their products to retailers. Certain customers are sold box forming
machinery. These machines are used directly and predominantly in the production of tangible
personal property, i.e., the boxes. Customers may purchase only the box forming machinery, or may
purchase the machinery in conjunction with the corrugated material.
The terms and conditions under which the corrugated material and machinery are sold are
as follows:

1. No separate billing is made for the sales price of the machine. The customer agrees to
   purchase a certain quantity of corrugated material within a specified period of time. The sale price
   of the machine is included in the unit price of the corrugated material. The title to the machine is
   transferred at the time the customer complies with the terms of the agreement.
2. A separate billing is made for the sale price of the machine. A percentage of each purchase
   of corrugated material is used to reduce the sale price of the machinery. Title to the machine passes
   when the terms of the agreement to purchase corrugated material are complied with.
3. Installment billing - A fixed dollar amount is billed solely for the machine over a specified
   period of time. Title to the machine is transferred when all payments are collected.
   Section ll15(a) of the Tax Law provides, in part, as follows:
   (a) Receipts from the following shall be exempt from the tax on retail sales
   imposed under subdivision (a) of section eleven hundred five and the compensating

-2­
TSB-A-96 (43)S
Sales Tax
July 11, 1996

use tax imposed under section eleven hundred ten:
*
*
*
(12) Machinery or equipment for use or consumption directly and
predominantly in the production of tangible personal property, gas, electricity,
refrigeration or steam for sale, by manufacturing, processing, generating, assembling,
refining, mining or extracting. . .
*
*
*
(19) Cartons, containers, and wrapping and packaging materials and supplies,
and components thereof for use and consumption by a vendor in packaging or
packing tangible personal property for sale, and actually transferred by the vendor to
the purchaser. (emphasis added)
Section 528.13 of the Sales and Use Tax Regulations provides in part:
Sec. 528.13. Machinery and equipment used in production; telephone and
telegraph equipment; parts, tools and supplies. (Tax Law, § 1115(a)(12)) (a)
Exemption. (1) Exemption from statewide tax. An exemption is allowed from the
tax imposed under subdivisions (a) and (c) of section 1105 of the Tax Law, and from
the compensating use tax imposed under section 1110 of the Tax Law, for receipts
from sales of the following:
(i) Machinery or equipment (including parts with a useful life of more than one year)
used or consumed directly and predominantly in the production for sale of tangible
personal property, gas, electricity, refrigeration or steam, by manufacturing,
processing, generating, assembling, refining, mining or extracting. (This exemption
includes all pipe, pipeline, drilling rigs, service rigs, vehicles and associated
equipment used in the drilling, production and operation of oil, gas and solution­
mining activities to the point of sale to the first commercial purchaser.)
*
*
*
(c)
Directly and predominantly. (1) "Directly" means the machinery or
equipment must, during the production phase of a process:
(i)
act upon or effect a change in material to form the product to
be sold, or
(ii)
have an active causal relationship in the production of the
product to be sold, or

-3­
TSB-A-96 (43)S
Sales Tax
July 11, 1996

(iii) be used in the handling, storage, or conveyance of materials
or the product to be sold, or
(iv)
be used to place the product to be sold in the package in which
it will enter the stream of commerce.
*
*
*
(4)
Machinery or equipment is used predominantly in production,
if over 50 percent of its use is directly in the production phase of a
process.
Section 528.20 of the Sales and Use Tax Regulations provides, in part, as follows:
Reg. Sec. 528.20. Cartons. containers, and wrapping and packaging materials
and supplies.--(Tax Law, Sec. 1115(a)(19)). (a) Exemption. (1) The sale of cartons,
containers, and wrapping and packaging materials and supplies, and components
thereof for use and consumption by a vendor in packaging or packing tangible
personal property for sale. and actually transferred by the vendor to the purchaser, is
exempt from sales and use tax. (emphasis added)
In Matter of Colgate-Palmolive-Peet Company v Joseph, 308 N.Y. 333, the Court of Appeals
held that when the taxpayer sold its products in corrugated cardboard cartons, there was a sale not
only of the contents of the carton, but of the carton itself.
Pursuant to Section 1115(a)(19) of the Tax Law and Section 528.20(a) of the Sales and Use
Tax Regulations corrugated boxes and material sold for use and consumption by a vendor in
packaging or packing tangible personal property for sale, and actually transferred by the vendor to
a purchaser, are not subject to sales tax. In addition, pursuant to Section 1115(a)(12) of the Tax Law,
the sale of machinery or equipment for use or consumption directly and predominantly in the
production of tangible personal property for sale is not subject to sales tax. Therefore, provided the
boxes being manufactured by the customers of Petitioner's client for shipment of the customers'
products are not returnable but are actually transferred to the purchasers of the products, the sale by
Petitioner's client of the corrugated material will not be subject to sales and use taxes. Moreover, in
accordance with Matter of Colgate-Palmolive-Peet Company v Joseph, supra, provided the boxes
being manufactured by customers of Petitioner's client for shipment of the customers' products are
not returnable, the transfers of the boxes to the purchasers of the products constitute sales of the
boxes. Therefore, if a box forming machine is used directly and predominantly in the production
of boxes that are actually transferred to purchasers, pursuant to Section 1115(a)(12), the sale of the
box forming machine is not subject to sales and use taxes.
With respect to terms and conditions "1" and "2" Petitioner's client is not required to collect
sales or compensating use tax on the receipts from the sale of the corrugated material and

-4­
TSB-A-96 (43)S
Sales Tax
July 11, 1996

the machine, if Petitioner's client receives a properly completed exempt use certificate, Form ST-121,
with respect to both the corrugated material and the machine within 90 days after delivery of the
property. See Section 1132(c) of the Tax Law and Section 532.4 of the Sales and Use Tax
Regulations. If Petitioner's client does not receive within 90 days of delivery an exempt use
certificate for either the corrugated material or the machine, the client must collect sales or
compensating use tax on the receipts from the sale of both of these items.
If Petitioner's client timely receives a properly completed exempt use certificate for either the
corrugated material or the machine, but not for both the corrugated material and the machine, the tax
consequences will be different under terms and conditions "1" and "2".
With respect to term and condition "1", the corrugated material and the machine are sold as
a single unit. Pursuant to Section 527.1(b) of the Sales and Use Tax Regulations, if either the
corrugated material or the machine is not exempt, the total receipts from the sale of the material and
machine are subject to sales or compensating use tax. Petitioner's client will have to collect tax on
the total receipts, therefore, if an exempt use certificate is not timely received for both items. If,
however, the exempt use certificate indicates that both the corrugated material and the machine are
being purchased for an exempt purpose, Petitioner's client will not have to collect tax on the receipts
from the sale.
With respect to term and condition "2", the sale prices of the corrugated material and the
machine are billed separately. Provided the corrugated material and the machine can be purchased
separately and independently of each other, if Petitioner's client timely receives an exempt use
certificate for either the corrugated material or the machine, the client will not be required to collect
tax on receipts from the sale of the exempt item. Petitioner's client will be required to collect tax on
the item for which no exempt use certificate is timely received. It is noted that the separately stated
prices for the corrugated material and the machine must be reasonably related to the true value of
these items.
As for term and condition "3", pursuant to Section 1115(a)(12) of the Tax Law, the sale of
machinery or equipment for use or consumption directly and predominantly in the production of
tangible personal property for sale is not subject to sales tax. In accordance with Matter of Colgate­
Palmolive-Peet Company v Joseph, supra, provided the boxes being manufactured by customers of
Petitioner's client for shipment of the customers' products are not returnable, the transfers of the
boxes to the purchasers of the products constitute sales of the boxes. Therefore, provided the box
forming machines are used directly and predominantly in the production of boxes that are actually
transferred to purchasers, pursuant to Section 1115(a)(12) the sale of the box forming machine is not
subject to sales and use taxes. Petitioner's client will not be required to collect tax

-5­
TSB-A-96 (43)S
Sales Tax
July 11, 1996

on the receipts from the sale of the machine if the client timely receives a properly completed exempt
use certificate.

DATED: July 11, 1996

/s/
John W. Bartlett
Deputy Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth therein.